WHY SMALL BUSINESSES SHOULD HAVE A NON-COMPETE… AND WHY THEY SHOULDN’T
For Michigan’s small business owners, the risk of hiring, training, and paying a new employee can be tremendous.
The greatest risk, however, can be that a direct competitor will hire that employee, thereby capitalizing on the employer’s investment in the employee. To limit this risk, Michigan businesses often require new employees to sign noncompete agreements. These agreements can be enforceable if the intent is legitimate and the scope is reasonable.
But before you have an employee sign a noncompete agreement, the advice of an employment attorney is crucial to determine the reasons for the noncompete agreement, as well as the language contained within it. The language that is enforceable in Detroit may not be enforceable in Traverse City because of market dynamics or geography. In other words, while case law (prior court decisions) is important, no two situations are identical. As a result, if employers are serious about preparing an enforceable noncompete agreement, they must think carefully about the purpose, language, and motivation for the noncompete. Here are two good reasons to require a noncompete – and one very bad reason to require a noncompete.
Good Reason – Your Company has Trade Secrets
If your company has trade secrets that provide it with a legitimate competitive advantage, this can be a good reason to require a noncompete. But be careful what you call a “trade secret.” If you speak about it openly, have written articles on the topic, or if the information is generally available through a Google search, it’s not really a trade secret.
Good Reason – Your Company Has Confidential Information
If your company has confidential manufacturing processes, marketing information, or customer lists, and the only real way to protect that information is with a noncompete, then you should consider a noncompete. But be careful. If there is another less restrictive way to protect the information, a court may limit the scope of the noncompete.
Bad Reason – You Don’t Want Competitors to “Steal” Your Employees
If the real reason you want the noncompete is because you want to restrict employee mobility, then you have a problem. Under anti-trust law, employers are supposed to compete for employees. The idea is that employer competition for employees drives up wages, which benefits working class families. But if employers do not have to compete for services because the employee cannot leave the employer for a competitor, wages are suppressed. With employees unable to transition from one business to another, they lose their ability to negotiate a higher rate of pay. But the Department of Justice has caught onto this. So too has Michigan’s Attorney General, Dana Nessel. Requiring non-competes to suppress competition is illegal and possibly even criminal. If your real intent with a non compete is to prevent a competitor from “poaching” your employees, your company should skip the non compete and offer to pay your employees more, or offer additional benefits, to encourage them to stay with your company.
Conclusion
Noncompetition agreements can be an important part of protecting a business’s value. By establishing fair ground rules for competition, and litigation, employers and employees can obtain a level of certainty and clarity. The noncompete agreement must serve a legitimate purpose, however, and be reasonable in scope. When litigation becomes necessary, contact an employment attorney in your area because noncompete disputes can be geographically specific. Your attorney will take steps to ensure your business is protected to the greatest extent possible.
